A decade on, Romania and Bulgaria assess their roles in Europe

The 10 years since Bulgaria and Romania joined the EU has been a decade of intense social and economic change. The two countries are still seen as the “poor relations” of the EU, but that is starting to change, at least for Romania, thanks both to its booming economy and the changing dynamics within the bloc.

However much the future of the EU and the wisdom of allowing the two Southeast European countries to enter on January 1, 2007 may be in question, it’s abundantly clear that their populations have grabbed the opportunities offered by membership with both hands. Millions of people from both countries have seized the chance to work and study in other EU countries. Romanians and Bulgarians now work for multinational companies, drive on EU-funded roads, buy products from across the continent in their supermarkets (mostly European giants from France, Belgium and Germany), and can trace efforts to fight corruption and improve the business climate at least partly to pressure from Brussels.

The impact of EU structural funding is highly visible in parts of Romania and Bulgaria, especially in the roads built using EU money. In Bulgaria, the difference between the new motorways snaking across the south of the country (built with EU cash) and the poor condition of those in the north is striking. Sofia’s spanking new metro was also built with EU funding.

That being said, convergence with the rest of the bloc, even the Central European countries that joined in 2004, is still very much a work in progress. The latest data from Eurostat shows that as of 2015, Romania’s GDP per capita was 57% of the EU28 average – up from 43% in 2007, but still the third lowest in the bloc above only last-placed Bulgaria and Croatia. Bulgaria’s GDP per capita, meanwhile, is only 47% of the EU average, up from 41% in 2007 – showing that Romania is not only converging faster with CEE but also rapidly drawing ahead of its Balkan neighbour.

The two countries also top the list of EU countries in terms of the number of people at risk of poverty or social exclusion, again with Romania faring somewhat better than Bulgaria. Groups such as residents of isolated rural areas and the Roma minority have not benefitted from overall economic convergence. Observers in Bucharest talk about the “two Romania’s” as the difference widens between the internationally mobile urban elite and the rural population, some of whom are at subsistence level.

Improvement is also needed on EU funds absorption. Both governments have struggled to use their full allocations of funding in the 2007-2013 programme period, held back by corruption and inefficient public administration and procurement processes.

Friends with benefits

Having said that, there is broad agreement on the immense benefits both countries have gained since joining the bloc, in particular in terms of the business environment. “Joining EU was a key milestone of Bulgaria after abandoning the communist regime in 1989. This was the biggest change that happened to Bulgaria and as a result of the whole transformational process, the country is now seen as an entirely different investment destination,” says Kamen Kolchev, CEO of Elana Financial Holding in Sofia.

He cites predictability for investors as the most critical change. “The benefits are crucial – at a first glance, it is the access to a larger market, the EU funds. However, for me the most important benefit is the common regulation and the community rules, gradually being imposed in Bulgaria, which accelerated the positive change in the country,” Kolchev continues.

It is a similar picture in Romania, though just as in Bulgaria there is still work to be done. “Of course, the benefits [for Romania] have been great, from agricultural modernisation, to high-tech innovation to economic growth,” says James Wilson, founding director of the EU Romania Business Society. “The country is converging with its Western European neighbours while holding on to its own identity… but we must recognise that there are still challenges to overcome, around the independence of the judiciary, free media, anti-corruption and a business-friendly, investor-safe environment for foreign investors.”

Indeed, one of the biggest changes resulting from EU accession has been the arrival en masse of international investors. Car manufacturers have been targeting CEE since the 1990s and auto-components producers have flocked after them into the region. Within Southeast Europe, Romania in particular has been attractive for manufacturers thanks to its large workforce. A new industrial belt has grown up around the cities of Timisoara and Arad close to the Hungarian border, where investors can benefit from the excellent Hungarian road network to transport their goods to Germany and other West European countries.

Another prospering sector is IT and shared services, with Romania again leading the way, although Bulgaria is also seeking to sell itself as a destination for the IT sector. Investments may have initially been into call centres offering low-paid jobs, but increasingly higher value services such as software development are coming to the country.

“The composition of FDI in Romania shows it is really integrated into the EU economy,” says Gunter Deuber, Raiffeisen Bank International’s head of CEE research in Vienna. “Unlike Bulgaria, where a lot of money went into real estate and the financial sector without much value added domestically, Romania has received a decent share of FDI in manufacturing and other sectors. I see Romania as a well-integrated economy that has profited from the free market and free flow of goods and investment.”

Much of this has been attributed to improvements to the business environment made over the last decade; on the World Bank’s “Doing Business” index, Romania has risen to 36th place on the 2017 index; Bulgaria is currently 39th.

“As a result of European integration, [Romanian] institutions have straightened out and become less Kafkaesque and more normal,” says Alexandru Birsan, partner at Bucharest-based law firm PeliFilip. “In the last few years, the judicial system and rule of law have significantly improved. There is still a way to go, but the answer to ‘Can I protect my rights?’ is yes. It might take a bit longer and be a bit more inconvenient than in Western Europe – but there are mosquitoes not dragons.”

Having said that, Wilson points to a range of issues that need to be tackled if Romania is to continue to attract and retain investors. He points to figures from greenfield investment monitor fDi Markets, showing year-on-year declines in foreign direct investment in Romania between 2011 and 2015.

“The economic success story of Romania seems pretty clear to me… but there are increasing concerns about public funds for investment and the country’s per-capita growth numbers remain low,” he warns. “There is serious concern about attitudes towards foreign investors in recent times, with the government picking losing battles with Raiffeisen, CEZ, E.ON and Enel, as well as risking relations with Kazakh energy investors KMG International, who seem crucial to the country fulfilling its energy and security potential.”

Moreover, there are serious worries about corruption levels in both countries, the main reason why so many people questioned the decision to allow them to join the EU as early as 2007.

Some observers claim that the situation went backward in the years immediately after accession, when the intense scrutiny during the accession period ended and politicians were given access to large amounts of EU funds. Several of the cases currently being investigated by Romania’s National Anticorruption Directorate (DNA) date back to this period.

Indeed, the European Commission acknowledges that when they joined the EU, Romania and Bulgaria “still had progress to make in the fields of judicial reform, corruption and organised crime”. The EU, therefore, decided to launch the Cooperation and Verification Mechanism (CVM) to help them address any outstanding shortcomings. Annual CVM reports track achievements and point out areas where more work is needed.

Partly promoted by EU pressure, Romania launched the DNA in 2012 and its head Laura Kovesi and her prosecutors have been unafraid to go after top politicians and influential businesspeople. Those that have come under investigation by the DNA include Victor Ponta, Romania’s sitting prime minister at the time the probes were launched, and numerous other current and former ministers. The DNA has its detractors, those who say it is too aggressive and relies too much on evidence from the security services, but overall it has become a strong deterrent to corruption and contributed to changing the political climate in Romania.

By contrast, Bulgaria has struggled to pursue a coherent anti-corruption strategy. Ambitious reform plans have been drawn up in the last two years – Prime Minister Boyko Borissov pledged in early 2015 that his new anti-corruption strategy would allow Bulgaria to overtake Romania – in practice the ongoing political uncertainty in the country has made it difficult to progress with critical reforms.

This has opened up the debate on whether it would have been better to wait rather than expecting reforms to continue in the two countries post-accession. “With regard to some indicators, it may have been a little bit early for Romania to join the EU in 2007, but there was a certain window of opportunity at that time, and in recent years Romania has shown a reasonable drive to improve,” says Deuber.

Wilson considers the decision to allow Romania to enter the EU in 2007 was correct. “We advance in tackling those issues much faster with them firmly inside the European family,” he says. “We should acknowledge that the trends are overall positive, although sometimes there can be a step backwards.”

“I think we can say now it is never early and never late to join a community like EU,” agrees Kolchev. “Bulgaria and Romania were poorer and less prepared that other EU members, and then time proved the discrepancies could be reduced because the membership was a kick-start for reforms and helped abandoning faster old values. I do believe that Bulgaria joined EU at the right time.”

Second-tier members

However, corruption and poverty are the two key reasons why Bulgaria and Romania are still seen as “second tier” EU member states even a decade after their accession. This was highlighted at the recent round of talks on the EU-Canada Comprehensive Economic and Trade Agreement (CETA), when both countries conditioned their approval of the deal on being granted the same visa free status by Canada as other EU member states.

As nationalism and euroscepticism rises in countries across Europe, from the UK to Hungary, many people from the two countries find themselves on the receiving end of xenophobic political rhetoric, verbal abuse and even physical violence. There was an upsurge of abuse against immigrants from within and outside the EU after the UK’s Brexit referendum, but similar incidents have also been reported in France, Germany, Italy and other countries.

Andrei Tarnea, executive director of the Aspen Institute Romania, cites polls that show many Romanians living in other EU member states are extremely worried about their future. “People feel this return to nationalist pseudo-sovereignty as a threat to labour mobility in Europe… In that respect, the next two to three years are going to be critical to what kind of society we will build in Europe. For the Romanian government, one of the priorities must be to continue to defend the right of Romanians living abroad.”

But the ongoing turmoil within Europe could also represent an opportunity for countries like Romania and Bulgaria that have until now hovered on the periphery of the bloc.

Romania, in particular, as a populous and increasingly prosperous country, is looking for a greater role within European decision making. Its December 11 election highlighted the fact that both major parties, the centre left Social Democratic Party which won the election, and the centre right National Liberal Party, are firmly behind the country’s EU integration and eventual adoption of the euro. This is in stark contrast to the growing euroscepticism among politicians in CEE countries such as Hungary and Poland, meaning Romania could potentially provide a counterweight to Budapest and Warsaw from the region.

Wilson believes Romania has the potential to be a “rising star” within the EU, provided it can “get the fundamentals right and name a government that is prepared to be bold in the national interest”.

“Romania can play a robust role in supporting the EU project, but with a healthy dose of realism,” he tells bne IntelliNews. “I think we could see the nation being an important defender of EU values, all the more so as we see worrying illiberal trends… across Hungary, Poland, Slovakia and the Czech Republic.”

For this to happen, however, Romanian officials need to reassess the country’s position. “At some point, Romania may need to make strategic decisions. We see Hungary and Poland departing from pro-EU politics and having more nationalist agendas, while other countries like the Czech Republic and Slovakia remain on the pro-EU side,” says Deuber. “For Romania, it would be rational to look for closer contacts among the converging economies that also have a pro-EU stance and form some sort of coalition to lobby at the EU level.”

In Bulgaria, the situation is more complex, given its historic ties with Russia, which remains the country’s sole energy supplier. This led to conflict with the European Commission in 2014, when Sofia wanted to push ahead with the now-cancelled South Stream gas pipeline project despite warnings it could be breaching sanctions against Russia. The country’s staunch EU enthusiast president, Rosen Plevneliev, will shortly be replaced by General Rumen Radev, reportedly the candidate favoured by Moscow.

Elana’s Kolchev indicates the business community is also less eager for Sofia to become a leader in Europe. “EU decision-making process is pretty fuzzy. I think it is enough for Bulgaria to stand for its interests and to value solidarity in the union,” he says.

Whatever the ambitions in Bucharest and Sofia, the view forming in Brussels is in many ways a gloomy and panicked one. The expansionist mode the EU was in a decade ago has been replaced by a retrenchment amid worries about the very survival of the union. While Romania and Bulgaria aim to adopt the euro, others question whether the single currency project can continue. “2017 will be the most important year yet for the continuity of the Eurozone as political and economic risk reaches the bloc’s very core in Germany, France and Italy,” Stratfor analyst Adriano Bosoni wrote on December 13.

Bulgaria and Romania will hold the EU’s rotating presidency in 2018 and 2019 respectively. For Romania in particular this could be a critical time, as the UK is likely to trigger article 50 in 2017, meaning it may be leaving the bloc in 2019.

Ironically, it could be one of the two problem children of the EU, who squeezed in at the tail end of the last wave of accession, which is now among the most enthusiastic about moving the EU project.

Russia's central bank has given troubled Binbank an unsecured loan, but has not disclosed the amount as it starts the rescue of yet another large "Garden Ring" commercial bank.

The two surviving independent members of the supervisory board at Ukraine's gas monopoly Naftogaz quit on September 19, citing "the government’s lack of commitment to duly implement the corporate governance reform".

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